It's Not So Bad… Ways in Which Retirees are Offered Unfunded Retiree Health Benefits

Jun 22, 2007 by

These days, many employers are offering their retirees unfunded retiree health benefits. Often referred to as “Access Only” plans, these health plans provide retirees with an opportunity to buy group coverage, but do not fund the coverage. These plans come in two varieties: plans in which retirees are rated with the workforce, and plans in which retirees are rated separately from the workforce. Although both of these types of plans are unfunded, they are still beneficial.

Example Population

Imagine that you work at a company with the following population:

Three active employees that use $500, $1,000, and $1,500 of healthcare per year each

Three retired employees that use $1,500, $2,000, and $2,500 of healthcare per year each

Plans in Which Retirees are Rated with Active Employees

These plans are the most generous unfunded retirement health plans. The active workforce is essentially cross-subsidizing the retired workforce. If the active workforce totally ignored the retirees, they would be paying a premium of $1,000 ([$500 + $1,000 + $1,500]/3=$1,000). However, since the active and retired employees are being rated together, are each paying a premium of $1,500 ([$500 + $1,000 + $1,500 + $1,500 + $2,000 + $2,500]/6=$1,500). Thus, this plan makes active employees pay $500 more than if they were not grouped with retirees. Retirees are likewise paying less than if they were grouped separately.

Plans in Which Retirees are Rated Separately from Active Employees

When retirees are rated separately from the active workforce, the active workforce does not perform any sort of cross-subsidy, but the retirees still benefit from group coverage. Many us cannot anticipate the extent to which we will require medical care. By pooling our risk, we can reduce the chance that we will get the short end of the stick and have unmanagable medical expenses. If the active workforce and retirees are rated separately in this example, the active workforce will have to pay $1,000 per year, and the retirees will have to pay $2,000 per year. Recall that the three retirees have $1,500, $2,000, and $2,500 in medical expenses. If they share costs and all pay $2,000, then one employee is worse off, one employee is better off, and one employee’s wealth is unchanged by the pooling. Even though some employees (those with low medical expenses) are worse off under a pooling arrangement, so long as they are not paying a large amount over their expected expenditures, they may like pooling, as it gives them piece of mind that their costs will be shared in the unfortunate event that they are struck with higher costs in the future.


When employees must “go it alone” in retirement, they are rated according to their own risk. This places some retirees in tough situations, as they are unable to share their medical expenses with the employees who were once their peers. Pooling arrangements can help reduce the risk that any single retiree will have to pay high medical bills. This benefit persists regardless of whether or not the company chooses to fund the¬†retiree health plan.

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1 Comment

  1. However heavy the burden of dealing with unfunded retirement health plans, the growing trend among corporations is a totally “go at it alone” with no funded or unfunded retirement health plan. Most young workers just entering the workforce will be subject to this lack of retirement health benefits, be they funded or unfunded.

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